Introduction

After World War II productivity growth in Europe boomed, providing a strong foundation for rapid improvements in the standards of living across the continent. But since the mid 1990s, Europe has experienced a significant slowdown in productivity growth. Average annual labour productivity growth (measured as GDP per hour worked) in the fifteen countries that constituted the European Union up to 2004 declined from 2.4% in the period 1973–95 to 1.5% in 1995–2006. Conversely, productivity growth in the United States significantly accelerated from an annual average of 1.2% in the period 1973–95 to 2.3% 1995–2006. While the USA was able to reap the benefits of the dawning knowledge economy, the European Union seems to have missed the opportunity to revive economic growth. In this chapter we will argue that there are distinct reasons for the European productivity slowdown and US acceleration since the mid 1990s. Our detailed industry-level analysis reveals that traditional manufacturing and other goods production no longer acted as major engines for the European economy. At the same time, Europe has been slow in taking up the benefits from the knowledge economy. In contrast to the USA, productivity growth in market services has not accelerated. We consider various explanations that are not mutually exclusive. The European growth slowdown might be related to long-term trends in the structure of the economy, such as the increasing demand for low-productive services and a gradual exhaustion of the potential for growth based on catching up in traditional technologies.